Sarbanes-Oxley Section 404(a) Deficiencies Found for First Time Filers
2/02/2009
Roseland, NJ—February 2, 2009—The Securities and Exchange Commission’s (SEC’s) Division of Corporate Finance has released a list of common financial reporting issues facing smaller registrants.
Among information provided during the recent PCAOB’s Forums on Auditing in the Small Business Environment were certain observations related to Section 404(a) compliance requirements.
The following are certain deficiencies discovered by the SEC in their review:
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Companies began but did not finish their assessment. In certain circumstances, companies indicated that they were unable to complete their evaluation due to insufficient time or resources.
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Companies were silent as to whether they did an evaluation and assessment. In many cases, companies did not include any disclosure that explicitly stated whether or not they conducted an evaluation or any indication of the conclusion on effectiveness. Some registrants indicated to SEC staff that they were confused about the distinction between internal control over financial reporting and disclosure controls and procedures and that two separate assessments are required.
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Companies did not believe they were required to conduct an evaluation. For various reasons, some registrants incorrectly believed that they were not required to conduct an evaluation. Among some of the reasons provided included inappropriately concluding that registrants were newly public companies as well as a belief that the requirement for management’s assessment had also been deferred.
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Companies did not perform an assessment because they consummated a reverse merger or were a shell company. A limited number of companies did not complete an assessment because they did not believe it applied to shell companies or they were a shell company that recently completed a reverse merger with an operating entity. The SEC staff noted that these are not newly public companies; therefore, absent any discussions with the SEC staff on this topic, these companies are required to comply with Section 404(a) of the Sarbanes-Oxley Act of 2002.
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Companies appear to have performed an assessment but did not disclose a conclusion. Some companies indicated in their disclosure that they did conduct an evaluation of internal control over financial reporting but did not disclose their conclusion on effectiveness regardless of whether they had disclosed material weaknesses or not.
It was noted that filings that did not include the appropriate disclosures in full compliance with the SEC’s rules implementing Section 404(a) of the Sarbanes-Oxley Act of 2002 represented a material deficiency and issuers would not be deemed to be current or timely for the purposes of certain form eligibility.
The SEC also reminded Forum participants that all registrants, including non-accelerated filers, with limited exceptions, are required to perform an evaluation of Internal Control over Financial Reporting (ICFR) and disclose that fact along with the conclusion on effectiveness in its Form 10-K.
It was indicated that management most conclude on both Disclosure Controls and Procedures and ICFR; each must explicitly state whether such controls are effective or ineffective. Non-accelerated filers are not required to include a related attestation report from the auditor in Form 10-K as required by Section 404(b) of the Sarbanes-Oxley Act of 2002 until fiscal years ending on or after December 15, 2009.
Any companies with questions on how their own evaluation and assessments may be improved may contact a J.H. Cohn Sarbanes-Oxley professional at 877-704-3500.
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